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Treatment of payments for R&D money spent by individuals or entities before incorporation

I'm new to the start-up realm and have what may be a rather simplistic question. If individuals or another entity (LLC) that preceded a C-Corp's formation put forth funds for some of the R&D for a product which the new C-Corp will complete the R&D on, what, if any, is the proper way to treat payments from the C-Corp to reimburse the predecessor organizations and/or individuals for the initial R&D spend?
 

Answers

Jeff Taylor
Title: CFO
Company: Communications Co.
(CFO, Communications Co.) |

By "R&D" it sounds like you mean "IP", or intellectual property. In my experience IP typically comes into the company in a stage you describe in two ways. It was either contributed in exchange for equity, or cash was paid in exchange for "work for hire" or direct purchase of IP.

It is very common for founders to exchange their IP (the business idea itself, or some work product) for equity shares in a new entity, perhaps even a company they themselves founded, in which case it is exchanged for founders shares (we will skip the tax side of this for now). Companies buy other companies or products from other companies in much the same way: IP for stock. In this way, the individuals have a going forward interest in the company that is developing/commercializing their idea. It's not cash now, but it may be cash later.

A second way is to pay cash for IP. That can be done as work for hire, licensing, or it could be purchased as a straight up IP sale. In all of these cases someone is being paid cash for developing, licensing or straight exchange of developed IP.

Which has happened here? And are you looking for the accounting entries or something else? Your answer to "what has happened" will determine the accounting entries.

Shane Patrick Connolly
Title: Chief of Staff
Company: Council District 10, City of San Jose
(Chief of Staff, Council District 10, City of San Jose) |

Thanks, Jeff. I suppose that what is proposed is the straight-up IP sale you describe, unless there is a better way to handle it from a tax and/or accounting treatment standpoint.

Jeff Taylor
Title: CFO
Company: Communications Co.
(CFO, Communications Co.) |

Shane:

I hate to say it, but here is where you pull in your tax counsel (unless you want to tell us more about the company's present situation). It's one thing to say, "we're starting a company", it's another to say "we have a particular situation of an operating company that is running already and we want to do xyz...". If it's the latter, you're going to want your tax advisor (and legal counsel as well) to weigh in on the given facts and circumstances surrounding these events and they will need to know every detail in order to give you advice as to the right direction.

However, if it's the former, it is reasonably straightforward and you're not giving the forum here anything confidential and we can continue this conversation with others (hopefully) jumping in.

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